Understanding the Changeover to LLC
To convert a sole proprietorship to a limited liability company (LLC), you’ll file paperwork similar to creating a new LLC. As individual states govern business entities, you must follow your state’s procedures. This involves updating sole proprietorship registrations, bank accounts, and contracts to reflect the change. Depending on state naming laws, you may have to cancel your sole proprietorship’s trade name or Doing Business As (DBA). When forming an LLC, you must select a registered agent, file articles of organization, and draft an operating agreement.
Benefits of LLC Over Sole Proprietorship
Before discussing the steps to change from a sole proprietorship to LLC, it is essential to understand the benefits of doing so. LLCs provide the following advantages:
- Limited Liability
- Tax Flexibility
- Perpetual Existence
- Increased Credibility
Steps to Establish Your LLC
1. Check Your Business Name
The first step when changing from a sole proprietorship to an LLC is to ensure your desired business name is available in your state.
Additional Considerations
Before the transition, comprehend the differences in liability protection and taxes between the two business structures. Starting an LLC may attract more suppliers and customers than a sole proprietorship.
Can You Switch Your Existing Business to an LLC?
Yes, you can change your sole proprietorship to an LLC. It involves forming an LLC to replace your sole proprietorship rather than converting it.
Changing Your Business on Your EIN
When to Update EIN Information
Change your entity type or correct EIN information by submitting a letter to the IRS with your full legal name, Social Security Number, and new details. You need a new EIN if:
- There is a change in the business structure or ownership.
- You operate as a partnership.
- You incorporate.
- You buy or inherit an existing business that operates as a sole proprietorship.
Special EIN Transfer
LLCs and partnerships can transfer EIN in special cases, but sole proprietors require a new EIN if they experience bankruptcy, incorporate, take partners, or obtain another sole proprietorship.
Employer ID Necessity
An EIN is used to file payroll and income tax returns, except for sole proprietorships or single-member LLCs using a Social Security number. Obtain an EIN for hiring, working in a licensed industry, saving in a Keogh plan, or if the LLC has multiple members.